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LLC Costs Idaho Charity Property Tax Exemption

by Norris Law Group on December 18, 2014

A Limited Liability Company (LLC) can be an effective “pass-through” vehicle for many businesses, and can offer a great deal of tax savings. But an LLC must also be structured properly, and must be the “right tool for the right job.” Peter J. Reilly, a contributor to Forbes magazine, writes about an Idaho charity that recently found this out “the hard way.”

Idaho Youth Ranch, Inc. is a 501(c)(3) charity that provides “troubled children a bridge to a valued, responsible and productive future”. In a recent IRS filing, IYR claimed that it had a revenue stream of $17,858,570. Nagel Beverage Company, also of Idaho, offered IYR a building as a “non-cash charitable contribution” in 2006. Nagel Beverage Company bottled Pepsi, and went on to sell its business in 2009, but continued a charitable foundation that distributes educational grants.

When IYR accepted the donation of the building from Nagle, KeyBank of Idaho suggested that IYR pass the building through a single member LLC in order to facilitate financing and to ultimately save on taxes. IYR would then lease the building from the LLC at a rate of $25,000 per month. But then IYR applied for tax exempt status for the building itself, on the basis that the building would be used for only charitable purposes.

While it was true that the building was used exclusively for the charity, IYR wound up losing the charity property tax exemption on the building itself. IYR had the matter adjudicated in court in regard to a tax bill it received in 2009, and the Idaho district court based this on the following:

“According to the plain language of the statute, if a property is leased by the owner, the property is not exempt from taxation…“if any building or property belonging to any such limited liability company, corporation or society is leased by such owner … then the same shall be assessed and taxed as any other property….”

The Idaho Supreme Court made a similar ruling:

“The fact that the LLC rented the entirety of the property to the Youth Ranch is dispositive of this appeal. The district court correctly determined that the property was not exempt from taxation for the 2009 tax year.”

LLCs are very powerful financial vehicles, but they must be used properly. An experienced business law attorney can help you determine whether an LLC is the right choice for your business or charitable entity.

Attorney Graham Norris and his associates at the Norris Law Group serve the residents of Utah County, UT and throughout Utah, Wyoming and Idaho. Contact them today at 801-932-1238 or online for a free consultation.

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